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AIM rules review

The London Stock Exchange (‘LSE’) published a discussion paper in July 2017 inviting feedback by 8 September 2017 regarding proposed changes to the AIM Rules for Companies and AIM rules for Nominated Advisers (‘nomads’).

The discussion paper seeks to gather opinion on whether there should be a tightening up of the rules under which the AIM market is operated.

The market is beset with uncertainties. For example, a recent report indicated that the number of companies leaving the market because a broker or bank has resigned as their advisers reached an all-time high in the year to June 2017.

The proposals could be seen to reduce a number of the risks which are perceived to be faced by companies and investors in this market which has seen a fall in the index of 4.4% since its original launch in 1995.

For the investor there are valuable tax reliefs and incentives which may make investment into this market an attractive option, despite the perceived risks. The shares may benefit from business property relief (BPR) and therefore 100% exempt from inheritance tax. Investment may also be made under the Enterprise Investment Scheme (for companies which meet the size requirements) and can therefore provide income tax and capital gains tax reliefs.

If as a result of the proposed changes, AIM shares were seen to lose their perceived risk factor, we may also see a withdrawal or reduction in some of the generous tax reliefs which are available for investors in this market?

The key aspects on which LSE request feedback set out in the discussion paper are:

Formalising the early notification process

Under this proposal, the nomad would be required to enter into confidential discussions with the LSE setting out key information regarding the company and its proposed admission to AIM.

Guidance on when the LSE may exercise its AIM Rule 9 powers

A non-exhaustive list of factors is proposed to give guidance to nomads about the types of matters which may give rise to concerns for companies which are seeking admission to AIM. These factors include concerns around the good character, skills, experience or previous history of a director or key management, formal criticism of the company seeking admission and/or any of its directors by other regulators, and concerns over the company’s structure or business model i.e. matters which give rise to concerns regarding a company’s appropriateness for a public market. Companies listed on AIM are required to replace a resigned adviser within a month or they may be removed from the market. Improved processes for the scrutiny companies which nomads take on as clients could therefore reduce the risk that relations turn sour.

Eligibility criteria

Currently there are no specific eligibility criteria regarding minimum size, trading history or percentage free float (shares in public hands). One of the most significant proposals would require a company listing on AIM to have a minimum level of free float shares. For new applicants to AIM, the LSE seeks comments on whether the minimum level of equity fundraising should be set at £6m which already applies to non-trading investment companies.

Corporate governance requirements

Feedback is also invited on whether the current corporate governance disclosure requirement are effective or whether it should be made mandatory for AIM Companies to annually comply and explain against existing codes such as the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies and the UK Corporate Governance Code.

Fines for breach of AIM Rules

One proposal is to introduce automatic fines for non-compliance with rules such as late filings of accounts and disclosure of regulatory information.

The proposed changes seek to improve standards and the reputation of the market which should be welcomed. However, the suggestions such as the level of free float shares and minimum level of equity fundraising may prohibit smaller companies from raising finance on AIM.

Some AIM companies have grown significantly since their initial listing and are now very valuable. Had regulatory burdens applied in the full form when they listed (which is suggested in the discussion paper), these companies might not have been admitted to AIM.

Whist we support the proposals where they address key areas of concern with the AIM market, and believe that something should be done to bridge the gap between the existing full markets and AIM, we are concerned that the proposals as drafted may be a barrier to business, and prevent the very companies that the market was designed to encourage from entering the public stage.

Comments are invited on the discussion document until 8 September. If you would like to discuss this further or for more information on how Blick Rothenberg work with AIM listed businesses please contact Helena Kanczula.